Ireland’s stellar financial explosion of 2008 and the subsequent austerity plan, the largest ever undertaken by any country, continues to reverberate. We are stuck with an uncompetitive, semi-nationalized banking system that charges borrowers an interest rate premium on top of what our European counterparts pay for loans.
It’s uplifting to just blame the banks – they did, after all, help bring about the crash – but it’s also easy. Lenders here are forced to hold more capital than other European banks due to the scale of the crash; the higher incidence of arrears; and the pronounced difficulty in obtaining the underlying guarantee when someone does not repay.
We don’t have a culture of eviction, so there is a risk premium attached to lending in the Irish property market. You can’t have it both ways.
We also have a chronic housing and rent crisis which is based, more than anything else, on the construction hiatus that followed the 2008 period. According to the Central Statistics Office (CSO), the housing stock only increased by 8,800 (0.4%) between 2011 and 2016, which contrasts sharply with the growth of 225,232 net new dwellings recorded between 2006 and 2011.
Yes, the pandemic triggered the recent surge in demand and prices, but our supply chain starting point was considerably worse than in other jurisdictions. On May 1 this year, there were just 851 homes available for rent nationwide, a record high, according to real estate website Daft.
And now we find that up to 100,000 Celtic Tiger-era apartments are in need of repairs, the result of breaches of building regulations during the boom. It is understood that the task force set up by Housing Minister Darragh O’Brien to examine the issue of defects found that issues such as lack of fire safety equipment, structural defects and water ingress are present in up to 80% of apartments and duplexes built between 1991 and 2013, i.e. between 62,500 and 100,000 units.
This is a stunning testament to the lack of regulation associated with our latest building boom.
The image of a fire engine permanently parked outside a building entered the public consciousness with the fiasco at Priory Hall, the notorious firetrap apartment complex in North Dublin. The High Court ordered the evacuation of the block of 187 units in 2011 due to fire risks. The cost of the clean-up work currently amounts to 45 million euros. With the council recovering part of the bill through the sale of units, the taxpayer is liable for 15 million euros.
The list has since grown. St James’s Wood, Kilmainham, Dublin 8; Holywell, Swords, Co Dublin; Riverwalk Court, Ratoath, County Meath; Carrickmines Green, Dublin 18; Beacon South Quarter, Sandyford, Dublin 18; Millfield Manor, County Kildare; Longboat Quay, Dublin 2 are just some of the notable ones.
The statewide default bill is expected to be $2.8 billion, according to the task force, but several experts say that’s a conservative estimate. Around 80% of the faulty units are in the greater Dublin area, where most of the booming apartment building was located.
The bill is likely to result in a tax on the construction industry modeled on that of insurance. The mandatory 2% government tax on insurance policies offered by all insurers, triggered by the collapse of the former Quinn Insurance Group, is still in place 10 years later, inflating already high insurance costs.
A similar program for construction could also incorporate funding from the existing defective concrete block grant program.
“My officials, with the assistance of colleagues from other departments and agencies, as well as Revenue, have been working to identify and assess a range of options with respect to such a levy,” said said Mr. O’Brien in response to a recent parliamentary question.
A new tax will increase the cost of construction at a time of rapid construction inflation, an additional cost that will almost certainly be passed on to buyers in the form of higher prices. When no one is to blame, everyone pays.
Activity in the construction sector fell in June, the first contraction since April last year when the sector was constrained by public health restrictions, according to BNP’s latest Purchasing Managers’ Index (PMI). Paribas Real Estate for the sector. The report linked falling new orders to rising “pricing pressures”. He said companies were also more cautious about hiring due to weaker demand, with some respondents noting projects had been put on hold due to cost pressures.
The Central Bank also recently warned that supply constraints are driving up input costs in the housing sector, potentially jeopardizing “the necessary delivery of housing and other key infrastructure.” It forecasts housing production to reach 31,000 in 2024, with the total number of units delivered between 2022 and 2024 being about 5,000 lower than forecast.
We have come a long way for the dark days of the crash and its delicate aftermath. The job market is transformed, public finances too, but the sector at the center of the crisis, banking, is still recovering and the infrastructure deficit that has plagued the Irish economy for decades is arguably worse.